RBA makes May cash rate call
The Reserve Bank of Australia has made its decision on the official cash rate for May following speculation the central bank will hold rates despite the fallout from COVID-19.
The central bank acted as most economists predicted, holding the cash rate at 0.25 of a percentage point, having previously stated it was the lower bound for Australian rates.
According to Laing+Simmons managing director Leanne Pilkington, the central bank has already done its part in supporting the economy.
“The Reserve Bank governor recently challenged the government to focus on growth and productivity strategies to help the economy, eventually, emerge from the COVID-19 crisis,” she said. “[Having] more efficient taxation solutions, including the removal of stamp duty, is an obvious place to start. Interest rates are already rock bottom and on this score the RBA has done its part.”
What’s next for the cash rate?
According to AMP Capital’s chief economist, Dr Shane Oliver, Australians should get used to a historic low cash rate for longer, with it likely to take time before the central bank can move again on interest rates.
“The cash rate is as low as it’s going to go and the next move in rates will be up, but it’s at least three years away, probably more.
“The RBA has said on several occasions that it regards 0.25 [of a percentage point] as the effective lower bound for the cash rate.
“Based on the experience of other countries, there is no value in taking rates negative.
“So, any further easing in monetary policy will have to come from quantitative easing. In the meantime, the coronavirus-related shutdown will cause a big hit to growth that will take years to fully recover from.
“This in turn will mean that it will be many years before we see full employment and inflation in the target range of 2–3 per cent, which in turn will mean rate hikes are many years away.”